EXPERT ANSWER

Devaluation implies deliberate official lowering of the value of the country’s currency with respect to foreign currency.

During late eighties and early nineties, India's fiscal deficit increased considerably due to huge non-development expenditure by the government. The gross fiscal deficit was 6.6% of GDP during 1990-91. A major portion of this deficit was financed by borrowings (both from external and domestic source). The increased borrowings resulted in increased public debt and mounting interest payment obligations. In addition to this, India witnessed severe crisis in the form of significant rise in the oil prices. The import payment obligations rose much higher than the export receipts. As a result, the current account deficit rose to 3.69% of GDP in 1990-91. The only way to finance the growing deficit was through drain of foreign currency. India's foreign currency reserves fell from US$3.1 billion in August to US$ 975 million in July 1991. Therefore, an urgent need arose to restore the falling reserves. A major step taken was in this direction was the two-step downward exchange rate adjustment (devaluation).